Implications of Onchain Reputation: From Plutocracy to Valocracy

"Consider yourself to be a good man because others consider you to be so." - Socrates, as reported by Plato in the dialogue "Protagoras".

The governance system of DAOs as we know it today is too recent to call it functional, and that's no news to anyone. The golden years of DAO governance (and I would say that happened around 2021 to 2022), years after The DAO proved effective even after the hack, came with two major demands: an effective way to spend the large treasuries after a memorable DeFi summer and a way to secure the core of decentralization while spending those funds. And so, a sort of race for more elaborate governance systems began, which also brought us this doubt about how functional these governance models really are, after all, this rush for well-crafted governance models came with the specters of hurry on our shoulders. The market doesn't wait.

The models created are amazing, both for being a kind of tokenization of some governmental models we know today IRL, and for their mathematical or technical complexity (see the quadratic voting model or the model of institutionalized delegation). But all models, and I believe almost everything in the world, presuppose an expected action of what, by the way, is the most phenomenological thing there is: the action of man.

From here, we can address chronic issues (which I often refer to as tumors) of DAOs:

  • Bribery

  • Low participation

  • Centralization

  • And well... Perhaps plutocracy (depending on the perspective, it can be positive)

But how to solve all these problems that the created models couldn't fix? After such a DeFi summer (oh, how I miss it), it's hard to predict the issues of a bear market applied to a governance model. And mind you, when a DAO's treasury starts to dry up, things get complicated.

To what extent is plutocracy a problem?

I don't want to reinvent the wheel and try to tackle here the next revolutionary protocol that will fix all governance issues, especially because we have to analyze some things before saying that plutocracy is the villain of our decentralized fairy tale:

  • DAO's objective

  • Governance structure

  • Number of members (yes, that matters)

It's interesting to analyze these points because if we talk about a DAO that has the governance model of one token = one vote, we know that plutocracy will be higher, but we also know that it's a DAO with the potential to attract more investors, for example.

"Frequently, democracy ends in plutocracy, because the power of money is more effective than the power of morals or intelligence." - Vilfredo Pareto

You should also read about Pareto Efficiency
You should also read about Pareto Efficiency

So if we have democracy, capital attraction, and treasury utilization efficiency, we have the trilemma of DAO governance. 1) Once we maintain democracy and treasury efficiency (considering the community as a parameter for what would be effective), we lose capital; 2) If we maintain the efficiency of treasury utilization and want large values ​​inside the DAO, we lose in democracy; 3) And if we want democracy and capital attraction, we lose treasury utilization efficiency, since democratic decisions can lead to slower processes and mutual concessions, which can impact resource allocation efficiency (once again, the market does not wait), not to mention that this can lead to decisions that prioritize only return on investment at the expense of other values ​​oriented towards the community and its members (and the problem here is the restriction of focus, not the return on investiments itself).

The Trilemma of DAO Governance
The Trilemma of DAO Governance

But back to plutocracy: it is a limitation. Not a seven-headed beast, however, it is interesting to consider how we can maximize democracy participation, even within a predominantly plutocratic environment, in order to avoid suffering from the chronic problem of low participation.

A bit of context:

At the Ethereum Argentina hackathon in 2023, I was able to participate with an illustrious team, and it's no wonder we won 3 prizes and were the only ones in the entire hackathon to win this amount of awards. We came together proposing a reputation protocol, Lauro Gripa brought an idea that followed a bit of the ideas of, an initiative born in the Polkadot ecosystem that brings an interesting concept of reputation based on NFT badges.

Finally, I wanted to delve deeper into the idea and embarked on the journey of researching onchain reputation…

Reputation applied in DAOs

Reputation is the slippery fish of web3. Nobody knows how to feel or define it. The narrative goes back and forth, but we still don't know how to define it or who will define it. A great example of this is that if you go to the Alchemy list of reputation protocols you will find several distinct products, some focused on identity proof, others on social score based on engagement in social networks, others with a score based on community participation... Anyway. What would reputation be? All these facets together perhaps?

By definition in the dictionary: "Concept obtained by a person from the public or society in which he lives."

Emphasis, great emphasis on the part that highlights the society in which the subject lives, let's not forget that we are talking about an ecosystem constituted by communities. And that the reputation created in these communities in which we want to insert ourselves is what will count. And by the way, how much is a community's reputation worth to another? And if that reputation were cross-organization? Would we also have the possibility of creating an on-chain relationship between how much one community's reputation is worth to another? If so, this would be an interesting analysis of the approximation of two or more ecosystems.

Imagine you have a significant reputation in MakerDAO, and Balancer DAO decides to consider your reputation. This, in a way, indicates that Balancer DAO trusts the reputational parameters of MakerDAO.

Or in a member and DAO-level use case: suppose you have a voting weight equivalent to 2, but there's a reputation multiplier embedded. You assisted in community management, organized events, contributed to bug hunts, and had some proposals approved because they propelled the DAO you participate in. Now your voting weight isn't just 2 anymore, but 2 + 0.5% of your voting weight, for example. And as your reputation grows, your voting weight becomes 2 + 0.7%, 3, and so forth...

And what's most interesting is that, once again, I don't want to reinvent the wheel, so the DAO defines the reputation criteria. The intention is merely to create a framework that enables the effective use of this on-chain reputation. So, another interesting criterion when diving into DAOs is: does what this DAO considers as reputation align with what I consider as well?

"Our social connections shape our reputation and influence our behavior in surprising and profound ways." - Nicholas A. Christakis and James H. Fowler

Valocracy: Concept and Definition

Some time ago, I came across a very interesting text by Casta, a Brazilian technophilosopher with very interesting thoughts. The text, in fact, is a manifesto, the Valocracy Manifesto. One of the interesting points is that one of the advisors is Guilherme, a member of the Blockful team.

"Hence, 'Valocracy': A novel and structured social, economic, and political framework that attempts to leverage blockchain technology in order to create new forms of organizations with the goal of empowering communities along with their individuals and their combined efforts."

When we talk about efforts, both combined and individual, we need to chart a path that delivers these efforts in a tangible way to governance capable of reading this type of data. So, when we talk about on-chain reputation that considers efforts, we also speak of a DAO ecosystem that is moving towards being based more on valocracy than on plutocracy or political influence power in DAOs.

So now we have a social problem, which already exists but which we must transpose into the digital organizational universe: the trilemma of power. Democracy, valocracy, and plutocracy. 1) On one side, you can have governance that values equal participation but tends towards the monetary side: a demo-plutocratic governance. 2) On the other side, you can have governance that leans towards both participation considering the efforts of members, but prioritizes capital: a valo-plutocratic governance. 3) And finally, a more complex governance due to lack of capital, which encompasses equal participation of all and considers the efforts of members: a demo-valocratic governance.

The Trilemma of Power
The Trilemma of Power


Notice that when reputation becomes a variable, we open a new avenue and break the dilemma of democracy vs. plutocracy in DAOs. Of course, we don't solve (and I don't believe this is capable of being solved) the chronic problems of governance. However, now we have a new avenue in which some DAOs will be able to fit using on-chain reputation.

We are developing ZuTrust, a verifiable reputation protocol that can consider various factors (the DAO's choice) and can be cross-organization. Thus, we address some of the problems mentioned in this article and benefit somewhat from governance closer to valocracy. We will live a new trend in governance.

A big shout out to Casta, the author of the manifesto, and Lauro Gripa who has provided us with so much knowledge.

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